“It’s good to have an end to journey towards; but it is the journey that matters in the end.” — Ursula K. LeGuin

As I put the finishing touches on this investment diary, I feel both a sense of relief as well as a mild sense of emptiness. Bearing one's soul can be enlightening but it also becomes tiresome for the narrator as well as the audience. That said, the overall experience has been quite rewarding, and to paraphrase Buffett: A teacher is his own best student. It would seem that I have learned a great deal more than my reading audience by engaging in the hours of research and recollections which were necessary to complete the project.

The long and winding road which I traveled in my investment journey has turned out to be the greatest learning experience of my life, one which could never have been assimilated in a classroom. I believe that true wisdom can only be acquired through extensive experience. That said, I would not advise anyone to follow my course of action. It was akin to jumping into a pool of deep water and then deciding that it was time to learn how to swim.

When I started investing, I literally knew nothing about analyzing securities and my entire understanding of finance was limited to a pair of introductory accounting classes which I had taken almost twenty years prior. The one thing that I had going in my favor was an innate sense of value. The lesson is quite clear: Anyone with a sense of value possesses the ability to succeed in the stock market so long as they do not go broke in the interim, and one is not likely to go broke unless they allow their emotions to dictate their actions or attempt to accelerate their gains by employing leverage.

If an investor merely understands the concept of value and is willing to spend the necessary time to educate themselves about rudimentary security analysis, they will invariably succeed in outpacing the gains of the S&P. Of course that process requires motivation and patience — motivation to learn the various methods of security analysis and patience to wait out the slowly advancing returns. The game of value investing is analogous to the famous parable about the tortoise and the hare. Indeed, it is the tortoise that typically excels in the race to gain long-term capital appreciation.

The aspiring investor must also understand how opportunity arises. It has been my experience that value opportunities invariably result from what I call the “UUU.” Either a potential value stock is: Unloved, Undiscovered or not Understood. Of course many value stocks may overlap the various categories. In other cases, it is the investor, not the market, who is mistaken about the intrinsic value of a stock.

Unloved stocks are generally tied to industries or sectors that are currently out of favor. Many coal, steel, mining and mining equipment stocks would currently fall under that category. Undiscovered stocks are typically tiny companies which hold outstanding value potential; they are under-followed by institutions and private investors. This has been the area in which I have encountered my largest percentage gains.

Finally, stocks which are not understood are ones which routinely confound the market and baffle the value investor. These entities are frequently the source of value traps, although they can sometimes supply value investors with their finest hour. As all novice investors will sooner or later learn: “all that glitters is not gold” when it comes to security analysis.

Just one more thought before I move on to the true underlying value of saving money and investing it effectively. Many investors sabotage their long-term performance by spending too much of the time holding excessive positions in cash. Indeed, the daily, monthly and even yearly fluctuations of the quoted prices of an investment portfolio can become nerve-wracking for an investor. Additionally, the individual is constantly bombarded by negative news and purveyors of doom in regard to the direction of the economy and the country as a whole. Furthermore, many times the market moves up too quickly and the valuations metrics for the various indices appear to be stretched.

All that said, one point remains poignantly clear. Investors need to spend most of the time close to fully invested if they wish to accumulate significant wealth over a long period of time. At times it is prudent to hold back some cash and wait for a better opportunity, but those times should be a reflection of one’s inability to uncover value propositions as opposed to one’s opinion that the overall market is due for a correction.

One of the least discussed secrets of Walter Schloss’ extraordinary returns over decades was the fact that he stayed close to 100% invested through the thick and thin of the market cycles. Such resolution is admirable. For most value aficionados, staying fully invested during down cycles is easy since bargains appear in abundance. The true test involves the courage to stay the course when the market appears to be expensive and values become difficult to locate.

I am not suggesting that overpriced stocks should not be sold or that a high percentage of equities must be held at any price; rather, I am advocating that investors must continue to hold extensive positions in equities unless they simply cannot locate any semblance of value.

The first half of 2013 served as just such a reminder. In the first seven months of 2013, the S&P index was up approximately 19%. Investors who selectively purchased and held a basket of value stocks have exceeded that percentage substantially. All the time, investors who were holding extensive cash in hopes of a significant correction are still waiting.

The Intrinsic Value of Successful Investing

I would be remiss if I did not conclude with a few paragraphs on the true value of attaining wealth. Philosopher and novelist Ayn Rand once observed: “Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver.” In other words, accumulating wealth accords an individual the means to achieve contentment but it still remains incumbent upon the individual to navigate the proper pathway.

In my own case, successful investing has allowed me to take a job working with Special Education students. I enjoy the time I spend with “my kids” immensely and it accords me a sense of happiness and fulfillment which I have never before experienced.

While money may not buy happiness, it allows an individual the freedom to pursue the interests which can lead to his self-actualization. It has also been my experience that the gift of giving back to others, particularly ones who desperately need your help, provides a positive feeling like none other.

I close the series on a philosophic note, with the final line, from the final song, of the final Beatles album: “In the end, the love you take is equal to the love you make.” The only difference is that the “love you make” is so much more gratifying.

About the author:

John Emerson

I have been of student of value investing since the mid 1990s. I have continued to read and study value theory on an ongoing basis. My investment philosophy most closely resembles Walter Schloss although I employ considerably less diversification. I also pattern my style after Buffett's early investment career when he was able to purchase shares of tiny companies.

"...I am advocating that investors must continue to hold extensive positions in equities unless they simply cannot locate any semblance of value."

I could not agree more. Definitely the Schloss way. I believe Pabrai also follows this.

I wonder then what is your take on the relatively high cash levels Seth Klarman always seems to maintain? I have never quite understood it myself, but maybe it's because he is anticipating a macro event in the negative as a result of Bernanke's Fed ie another great recession? (I gather this from his recent comments but I recall Buffett always saying he does not pay attention to 'macro'.)

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